Low-Cost Way To Trade An Apple Rebound

Nov.15.12 | About: Apple Inc. (AAPL)

Amidst its 8th consecutive week of falling, Apple Inc. (NASDAQ:AAPL) is sitting on top of resistance. Testing lows not seen since May, Apple is currently sitting under $530. Pundits blamed President Obama's re-election as one reason for the stock's fall from grace, since many investors will be looking to realize capital gains before any tax increases can be passed or go in effect. No matter the reason for the weakness over the past 8 weeks, if you are looking to play the support Apple is seeing at this level for a potential upside trade, here are a two option spread strategies you can make using less capital than buying the stock for over $500, while limiting and defining you risk and potential losses, trading smarter.

Strategy #1: Long Call Spread

Buying a call spread is a bullish strategy with limited risk, as well as limited maximum return. The potential maximum your position can be worth is the difference between the two strike prices used. The potential loss or risk is the amount you pay for the spread. With Apple around $527, here your strategy will be using the December standard options, Buy 530 and Sell the 535 call.

  • 530/535 Long Call Spread
  • Cost: $2.30/contract Debit
  • Potential Maximum Value: $5.00/contract, over 100% return
  • Probability of Maximum Return: 43%
  • Potential Maximum Loss: Your cost, $2.30/contract
  • Break Even: $532.30

Strategy #2: Short Put Spread

Selling a put spread is a bullish strategy with defined risk, in which you will be able to take advantage of Theta Decay, or the decrease in option value from time decay and shrinking days to expiration. As long as Apple remains above your designated short put, you will keep the entire credit. Again, with Apple are $527, your strategy will again be using the December standard options by Selling the 520 and Buying the 515 put.

  • 515/520 Short Put Spread
  • Credit: $2.10/contract
  • Potential Max Loss: $5.00/ contract
  • Probability of Maximum Return: 63%
  • Break Even: $517.90

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.